Friday, December 12, 2008

Some maintain that there is no federal statute imposing a tax on income derived from sources within the United States by citizens or residents of the United States. They argue instead that federal income taxes are excise taxes imposed only on nonresident aliens and foreign corporations for the privilege of receiving income from sources within the United States.

The premise for this argument is a misreading of sections 861, et seq., and 911, et seq., as well as the regulations under those sections.

The Law: As stated above, for federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. I.R.C. § 61. Further, Treasury Regulation § 1.1-1(b) provides, “[i]n general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.” I.R.C. sections 861 and 911 define the sources of income (U.S. versus non-U.S. source income) forsuch purposes as the prevention of double taxation of income that is subject to tax by more than one country. These sections neither specify whether income is taxable, nor do they determine or define gross income.

These frivolous assertions are clearly contrary to well-established legal precedent.

In March 2005, a federal district court in Florida barred Gregory T. Mayer from preparing false or fraudulent returns and selling fraudulent tax schemes relying upon, among other things, the frivolous section 861 argument, which falsely claims that income from sources in the UnitedStates is not subject to federal income tax. See http://www.usdoj.gov/opa/pr/2005/March/05_tax_119.htm; see also 2005 TNT 49-63 (Mar. 14, 2005). In August 2005, a federal district court in Florida permanently barred Carel “Chad” Prater and Richard Cantwell from promoting tax-fraud scams relying on the section 861 argument. See http://www.usdoj.gov/opa/pr/2005/September/05_tax_505.html; see also2005 TNT 204-51 (Aug. 30, 2005).**

Wednesday, December 10, 2008

This argument asserts that wages, tips, and other compensation received for personal services are not income, because there is allegedly no taxable gain when a person “exchanges” labor for money. Under this theory, wages are not taxable income because people have basis in theirlabor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed. A variation of this argument misconstrues section 1341, which deals with computations of tax where a taxpayer restores a substantial amount held under claim of right, to somehow allow adeduction claim for personal services rendered.

Another similar argument asserts that wages are not subject to taxation where a person has obtained funds in exchange for their time. Under this theory, wages are not taxable because the Code does not specifically tax these so-called “time reimbursement transactions.” Some take a different approach and argue that the Sixteenth Amendment to the United States Constitution did not authorize a tax on wages and salaries, but only on gain or profit.

The Law: For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. I.R.C. § 61. Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it isspecifically exempted or excluded. In Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994), the court stated, “an abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived.” The IRS issued Revenue Ruling2007-19, 2007-14 I.R.B. 843, advising taxpayers that wages and other compensation received in exchange for personal services are taxable income and warning of the consequences of making frivolous arguments to the contrary.**

Friday, December 5, 2008

Some summoned parties may assert that they are not required to respond to or comply with an administrative summons. Proponents of this position argue that a summons thus can be ignored. The Second Circuit’s opinion in Schulz v. I.R.S., 413 F.3d 297 (2d Cir. 2005) (“Schulz II”) is often cited to support this proposition.

The Law: A summons is an administrative device with which the IRS can summon persons to appear, testify, and produce documents. The IRS is statutorily authorized to inquire about any person who may be liable to pay any internal revenue tax, and to summons a witness to testify or to produce books, papers, records, or other data that may be relevant or material to an investigation. 26 U.S.C. § 7602; United States v. Powell, 379 U.S. 48 (1964). Sections 7402(b) and 7604(a) of the Internal Revenue Code grant jurisdiction to district courts to enforce a summons, and section 7604(b) governs the general enforcement of summonses bythe IRS.

Section 7604(b) allows courts to issue attachments, consistent with the law of contempt, to ensure attendance at an enforcement hearing "[i]f the taxpayer has contumaciously refused to comply with the administrative summons and the [IRS] fears he may flee the jurisdiction." Powell, 379 U.S. at 58 n.18; see also Reisman v. Caplin, 375 U.S. 440, 448-49 (1964)(noting that section 7604(b) actions are in the nature of contempt proceedings against persons who “wholly made default or contumaciously refused to comply,” with an administrative summons issued by the IRS).

Under section 7604(b), the courts may also impose contempt sanctions for disobedience of an IRS summons.

Failure to comply with an IRS administrative summons also could subject the non-complying individual to criminal penalties, including fines and imprisonment. 26 U.S.C. § 7210. While the Second Circuit held in Schulz II that, for due process reasons, the government must first seek judicial review and enforcement of the underlying summons and to provide an intervening opportunity to comply with a court order of enforcement prior to seeking sanctions for noncompliance, the court’s opinion did not foreclose the availability of prosecution under section 7210. **

Those proponents of this argument contend that section 6020(b) obligates the IRS to prepare and sign under penalties of perjury a federal tax return for a person who does not file a return. Thus, those who subscribe to this contention claim that they are not required to file a return for themselves.

The Law: Section 6020(b) merely provides the IRS with a mechanism for determining the tax liability of a taxpayer who has failed to file a return.

Section 6020(b) does not require the IRS to prepare or sign under penalties of perjury tax returns for persons who do not file and it does not excuse the taxpayer from civil penalties or criminal liability for failure to file.

Among the relevant cases United States v. Barnett, 945 F.2d 1296, 1300 (5th Cir. 1991) can be cited- where defense counsel in prosecution for willful failure to file individual federalincome tax returns raised inference that the IRS actually had somestatutory duty to file returns for delinquent taxpayers, court properlyinstructed jury that IRS has no such duty. **

Friday, November 28, 2008

One of the popular contentions going around is advising taxpayers to file a zero return regardless of their income, in order to reduce their Federal Tax Liability. Adding insult to injury, some of these ill-advised taxpayers claim a refund in addition to filing zero income.

The lowdown: There is nothing in tax law that allows an individual with taxable income to file a zero income return. Taxable income includes but is not limited to: wages, salary, tips, interest, dividends, rental income , retirement plans, pensions, annuities, social security, royalties, unemployment, bribes (yes bribes), alimony, jury duty, prizes and awards, Pulitzer prize, Nobel prize, stolen property (yes, if you steal property you must reported as income) and even bartering.

Of course there are qualifiers and under some circumstances some of this income is not taxable i.e. Social Security. However, if you derive income from any of these sources you must reported on your return and cannot claim zero.

This would apply to the "nunc pro tunc" argument, a similar argument made with the purpose of reducing the tax responsibilities of individuals.

For further information the IRS has written extensively in the document covering the majority of these positions in their Internal Revenue Bulletin 2006-15 (IRB:2006-15).

Tuesday, November 25, 2008

Where the first frivolous tax argument contends that the law does not impel citizens to file a tax return, this one argues that payment is somehow voluntary. Those who subscribe to this view argue that the Internal Revenue Code does not clearly demand or impose the payment of taxes. The IRS, however, has clearly addressed this position and warned taxpayers of the consequences of this view.

This position has repeatedly been addressed by the courts which continually uphold the view that individual citizens have a responsibility to pay their taxes, Federal and State. As in the case of United States v. Drefke. In this case addressing the state issue the Eighth Circuit Court of Appeals stated "For seventy-five years, the Supreme Court has recognized that the sixteenth amendment authorizes a direct nonapportioned tax upon United States citizens throughout the nation, not just in federal enclaves." citing the United States v. Collins case (920 F.2d 619, 629).

Several other relevant cases can be found such as United States v. Bressler, United States v. Gerards, Schiff v. United States, Wilcox v. Commissioner.

As stated in the initial article, the pursuit of these frivolous tax arguments end up costing the individuals who subscribe to them millions of dollars in legal fees, penalties and interest and even jail time.

Wednesday, November 19, 2008

There are two major arguments that apply to the "voluntary" nature of the tax system. Number one is the contention that Filing is voluntary, whereas the second one contends that Paying is voluntary, usually these two arguments go hand in hand. We'll first look at the former.

Proponents of the voluntary nature of the filing system point to IRS' own literature which point to the voluntary nature of the system. At some point even the 1040 instruction book made this mention. Additionally, the Supreme Court's opinion in Flora v. United States decided on March 21, 1960 (see page 362 of the decision) which says "Our system of taxation is based upon voluntary assessment and payment, not upon destraint".

Ever since this decision by the Supreme Court those who oppose the tax system have made reference to this statement in order to push forward their contention, however, the voluntary nature of the filing system is to allow the taxpayer to initially determine the amount of tax liability and complete the appropriate form rather then to have the IRS determine their taxes for them. However, US Code Section 6011 clearly states "...When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations."

Failure to comply with the filing requirement can have severe consequences including civil and criminal penalties, including fines and even imprisonment. Should you find yourself under these circumstances it is imperative that you put yourself in the hands of a competent tax consultant or attorney (in the case of criminal charges) in order to resolve the situation as soon as possible.

Today I'll start a series of articles geared toward answering some of the most common misconceptions regarding the authority, history and legality of the tax system. As a Tax Consultant my job is not to change the system, oppose it or transform it. My job is to advice taxpayers on the options available and look for the best solution for their individual needs. Now, there are some unreasonable contentions from some who oppose the tax system, however, there are also some reasonable arguments as well. I respect the opinions of those who oppose the tax system as long as their contention does not improperly advice individuals to illegally stop complying with their tax obligations. This type of advice is very costly to the individual leading as we'll see to tremendous tax burdens, legal difficulties and even prison. Again, there are legitimate ways to contend about the legitimacy of the tax system and our legal system has a due process that needs to be followed in order to put in effect new laws that take some pressure off of the shoulders of taxpayers, not to mention possibility to elect political representatives that agree with one's political views.

Wednesday, November 12, 2008

Who should itemize and when? The IRS gives taxpayers what is called a Standard deduction allowance that is adjusted every year for inflation. This standard deduction allowance varies depending on marital status, filing status and age and it varies between $5,350 for a single person and $10,700 for married person filing jointly. Taxpayers over the age of 65 get additional standard deduction as do the blind.

Now, if your total deductions exceed the standard then you should itemize with your tax return. To itemize means that you account for expenses that you incurred during the year that are deducted from your income, thereby reducing the tax burden.

Among the expenses that a taxpayer is allowed to deduct are, home computer, hobby expenses, legal fees, rental cost for deposit boxes, gambling losses and travel expenses. The most common are medical and dental expenses, property taxes, mortgage interest and charitable donations.

It is always a good idea to consult with an accountant or a tax consultant to determine the best way to file in order to maximize deductions.

Every year millions of tax retuns are filed, most of them will overlook legitimate tax deductions creating an unnecessary tax burden. The following is a list of 5 often overlooked deductions:

Moving Expenses.

Accounting Fees for tax preparation services and IRS audits.

Medical and Dental Expenses.

Taxes Paid.

Charitable Contributions.

Moving Expenses: Moving expenses are deductible if certain qualifications are met by the taxpayer. The move has to be work related (transfer, new job, etc...) The taxpayer must start to work within 1 year from the date he/she moved to the new location. Your new home must be closer to your place of work than your old home. Finally, your new job location must be at least 50 miles farther from your from your old home.

Accounting Fees for Tax Preparation Services: A taxpayer is allowed to deduct the cost of tax preparation services for the year that the fees were paid, including all schedules (A, C, E, etc...)

Medical and Dental Expenses: These expenses incurred by taxpayers is deductible if the cost is more than 7.5% of the adjusted gross income. Deductible medical expenses include but is not limited to: Prescribed birth control pills, non-cosmetic eye surgery, contact lenses, hearing aids and certain weight-loss treatment or interventions for the obese.

Taxes Paid: State and local income taxes paid, real estate, foreign real estate and occupational, among others.

Charitable Contributions: Most charitable contributions are tax deductible. Among them are contributions to churches and religious organizations, non-profit schools, war veteran's organizations, Salvation Army, Red Cross and most non-profit organizations.

The of allowed tax deductions is not limited to this list and many restrictions apply. As always, it is best to consult with a competent accountant or tax consultant about these and other liabilities to make sure that the amount deducted on each tax return is maximized.

Monday, November 3, 2008

Typically, when a taxpayer withdraws money from a Traditional IRA account before the age of 59 ½ they are required to pay an additional 10% tax on the distribution in addition to paying taxes on regular income tax on that amount. There are, however, exceptions to this rule:

You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

The distributions are not more than the cost of your medical insurance.

You are disabled.

You are the beneficiary of a deceased IRA owner.

You are receiving distributions in the form of an annuity.

The distributions are not more than your qualified higher education expenses.

You use the distributions to buy, build, or rebuild a first home.

The distribution is due to an IRS levy of the qualified plan.

The distribution is a qualified reservist distribution. **

Withdrawing money from a Traditional IRA before the age of 59 ½ under any circumstances other than these will create a tax burden. Should you find yourself in these circumstances make sure contact a competent tax consultant.

A traditional IRA account is a savings program that allows individuals under the age of 70 ½ to save toward retirement. The key to this savings program is that it allows taxpayers to deduct some or all of contributions from their in addition to tax-deferred growth, meaning that you don’t pay taxes on the income generated by capital gains, dividends and other gains generated by securities held in the IRA.

Now, the amounts that can be contributed to a traditional Individual Retirement Account is affected by marital status, income and if the taxpayer has a 401k program through his or her employer.

The following are the standards for 2008:

_The contribution limit is $5000 or $6000 if you are 50 years of age or older before the end of the year._ If you are married and file jointly the deductible contribution amount is $10,000 or $12,000 if both spouses are age 50 or older._ If you are covered by a retirement account at work then your contributions are limited if your Modified Adjusted Gross Income (see Modified Adjusted Gross Income article) is:

1. Between $53,000 and $63,000 for single individual or head of household.2. Between $83,000 and $105,000 for married filing jointly or qualified widow(er).3. Less than $10,000 for a married couple filing separately.

Caution: One of the most common pitfalls of the Traditional IRA account is that taxpayers are not aware of the consequences of early distributions. Since you cannot borrow money from an IRA as one can from a 401k, large tax liabilities are a dire consequence of these actions.

It is very important if you find yourself in this situation to contact an expert in tax liability and consult about the different options available.

Thursday, October 16, 2008

Question: I recently made some renovations to my rental property. I understand that these are tax deductible. What are the guidelines?

Answer: It all depends on the type of renovation. The cost of a general repair that is designed to keep the property in good working condition and does not add to the value of it is deductible. An improvement, on the other hand, is not tax deductible. In other words, anything that adds to the value of the property, prolongs its useful life and or adapts it to new uses is not deductible and must be depreciated, this includes any “repairs” that are part of an extensive remodeling project and or restoration.

If you have a child who is you son, daughter, stepson, stepdaughter, legally adopted child, brother, sister, stepbrother, stepsister, foster child (placed with you by an authorized placement agency or by court order) or a descendant of any of them you may be eligible for a Child Tax Credit. The child must also meet the Residency Test (live with you for more than 6 months out of the year), Age Test (under the age of 17 by December 31) Support Test (the child does not provide for himself more than half of his/her expenses) and be a U.S. citizen.

The child tax credit is as much as $1000 per child depending on your income. If you are married and filing jointly your credit will be reduced if your income is over $110,000.If your status is single, head of household or widow(er) your child tax credit starts being reduced after $75,000. Finally, for married couples filing separately they credit is reduced when the income is over $55,000.

Now, the Child Tax Credit is non-refundable, however, if the Child Tax Credit is greater than the amount of income tax owed, it may be refundable through the “Additional” Child Tax Credit.

As usual, always make sure to consult with a competent accountant or tax consultant.

The IRS has programs that offer free tax assistance to low income people, from tax preparation to tax counseling. The following is a list of some of these programs:

VITAThe Volunteer Income Tax Assistance or VITA is an organization made up of college students, law students, religious, military and community group volunteers that helps low-income taxpayers. Among other things they can assist in the preparation of basic tax returns. VITA is usually located across the country in neighborhood centers, libraries, schools and shopping malls. To find the nearest location contact the IRS.

TCETax Counseling for the Elderly or TCE provides help to taxpayers that are 60 years of age or older. Through a network of volunteers the provide tax counseling to the elderly and low income individuals. To find a volunteer site contact the AARP at (888) 227-7669.

LITCThe Low-Income Tax Clinic also provides assistance either for free or a nominal fee. In addition to low-income taxpayers they also help individuals that with limited English proficiency or who speak English as a second language.

For additional information or a free consultation about your tax liability and / or unfiled tax returns you can contact a Tax Consultant.